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What is investor-state dispute settlement (ISDS)?

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Investor State Dispute Settlement or ISDS is a neutral international arbitration procedure for the resolution of disputes between foreign investors and host states. ISDS can be enforced through international arbitration procedure before an international tribunal rather than through national courts.

The substantive and procedural legal protections offered by ISDS can be found in various international legal instruments including bilateral investment treaties, international trade treaties and international investment agreements.

ISDS is a powerful tool in an investors arsenal. Without it a foreign investor will very rarely have a right of direct recourse against the state. ISDS offers investors an additional layer of protection beyond that set out in their investment contract. The substantive protections enforced through ISDS protect investors against unilateral state action including freedom from discrimination, protection against uncompensated expropriation, protection against denial from justice and the right to transfer capital. Relying on national courts to enforce such international obligations is risky.

National courts are perceived to be lacking in independence or biased. Investors may find that they are not able to access the local courts or if they can access the local courts, that the relevant international obligations have not been enacted into local law and are therefore unenforceable by the local courts. Even in developed countries with strong legal systems adequate protection is not always offered to investors through the national courts.

In order to benefit from ISDS an investor will have to show that it holds the qualifying investment and is a qualifying investor for the purpose of the treaty it is relying on. Qualifying investor and qualifying investment will be differently defined depending on the treaty. However, these definitions are typically quite wide. Planning should be carried out at the outset of a transaction by the investor to ensure that it maximises the protections that it can seek to rely on.

ISDS has come under public scrutiny and reforms are widely advocated. However, these criticisms are not really supported by the empirical data. For example, one commonly held misconception is that investors always win. However, when you look at the statistics you will in fact see that states more commonly prevail. No doubt the system can be improved but investors and governments alike should understand ISDS and the important protections that it can offer.

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Holly Stebbing, a Partner in our London office, discusses investor-state dispute settlement (ISDS). Holly explains why both foreign investors and host states need to understand ISDS and the important procedural and substantive legal protections it can offer. Holly also addresses common misconceptions and criticisms of ISDS.